Taper: Our spin on their spin

Nazim Khan

Moneycontrol.com

So the Federal Reserve has finally embarked on a course that appears to be the beginning of the end of quantitative easing.

Ever since Prof Bernanke -- a keen student of the Great Depression who thought it was central bank inaction that allowed the ‘30s economic slump to worsen -- decided to crank up the printing press to save the US economy from the aftermath of the financial crisis of ’08, the world and its intertwined markets and asset classes witnessed a grand monetary experiment whose scale was unprecedented in economic history.

Setting short-term rates near zero and buying USD 85 billion of bonds every month to hold down long-term interest rates, Bernanke’s daring strategy earned its share of admirers and critics.

Also read:Fed tapers monthly bond purchases by USD10 billion, rates unchanged

While the jury is still out on how this will end, the central bank chief's action led to sharp moves in markets and asset classes that experts had a tough time explaining. This left them with no way but to fire up their imaginations to a level more creative than before, often prompting them to resort to explanations that consciously looked at the glass either half-empty or half-full depending on the event under consideration.

For instance, if stocks were to rally after particularly strong economic data, experts would say it was because of evidence of increasing economic strength. But if they fell, well, it’s because it would also mean the end of QE (which by the way appears to be a fancy word invented by market-men only so laymen could feel assured these guys knew what they were talking about).

So last night, Bernanke decided shaving USD 10 billion off its monthly bond purchases would do the US economy no harm. This was generally in line with what market experts were “expecting”.

Though in the build-up to the Fed meeting, the market had clearly calibrated its expectations from a “hawkish stance” to a “dovish stance”, covering all three scenarios neatly: strong taper, mild taper, no taper. (to digress, we believe the word “taper” was more the invention of space-starved editors who found “monetary-policy tightening” or “monetary-stimulus exit” too long to fit their headlines).

So in the wake of Fed’s announcement, let’s look at the impact it had overnight on various markets and asset classes, pull the most interesting spin experts consequently gave to them, and provide our light-hearted take as to what we think they could have as well meant.

Event: US dollar surged over 1 percent against both the euro and the yen.

Take: Richard Franulovich, Senior Currency Strategist, Westpac: "The forward guidance from the Fed has offset the tapering announcement. The Fed has come along and said we won't be hiking until we're well past 6.5 percent in the unemployment rate. That pretty much did it for the dollar."

Our take: You see, a stronger US economy will mean a stronger dollar. It’s that simple. For now, let’s forget about how more money in the economy could also mean a weak US dollar.

Event: US bond yields rose immediately in reaction to the announcement, fell soon after, and then rose again slightly.

Take: Daniel Heckman, Senior Fixed Income Strategist, U.S. Bank Wealth Management: "The announcement is bond-market friendly in terms of the limited size of the tapering so we're seeing some short-covering.”

Our take: The direction of the U.S. bond yields was much too all-over-the-place to take away anything from. But since you asked, I had to provide a view.

Event: US stocks surged to fresh highs

Take: Scott Clemons, Chief Investment Strategist for Brown Brothers Harriman Wealth Management: "The Fed is using a very careful language that they are going to continue to support the economy. That's part of the reason why the stock market is rallying."

Our take: Since stocks didn’t fall, I am not pulling out the how-the-taper-spells-doom-for-stocks explanation.

Event: Gold also rose

Take: Axel Merk, Portfolio Manager, Merk Funds: "The reason gold is doing well because the Fed is all but promising to be behind the curve in raising interest rates when inflation does pick up."

Our take: Look, I know a stronger US economy and a stronger dollar is typically bad news for gold, but since it rose, there must certainly be some bad news down the road that the yellow metal saw but stocks didn’t see.